Further Evidence that the Commercial Shorts Elastic Band Looks close to Full Stretch,..

Bill,
I’d like to expand on my analysis yesterday on the Commercial Short Position as a Proportion of Open Interest.

We are all aware of how aggressively the Commercials have ramped up their Short Positions in Silver in the last few weeks in a bid to defend the $35-36 Line and that without this ‘Short Swamp’ the price would very likely be well in the $40s by now,.

Here is the graph again that I showed yesterday highlighting the increase in the Commercial Short Position as a Proportion of Open Interest, CSPPOI, (Yellow Line) and the Silver Price (Blue Line):

I also went on to speculate that the CSPPOI was now at an extreme high against it’s historical descending upper channel line, which suggested that the Commercials were likely close to ‘fully in’ at this juncture and if they could not orchestrate a meaningful price decline from here then they were likely going to have to step away from the table.

Well this morning I’ve put in some further study which shows further evidence on an historical basis to suggest that we may indeed be about to ‘Pass the Rubicon’ again.

This time I looked at the relationship of the Silver Price with the Comex Open Interest as the Open Interest has been rising significantly of late,

As this chart clearly depicts, the start of the 3 proceeding ‘spike ups’ in the Silver Price in 2005/06, 2007/08 and 2010/11 all appear to ‘kick off’ around the time the Open Interest breaks 140,000 - A LEVEL ONE SHOULD NOTE WE ARE AT TODAY! One must also note there was one false alert in late 2009 when having spiked through 140,000, the Open Interest retreated quickly back below and a subsequent breakout in price was avoided, However on every occasion that the Open Interest continued to rise above 140,000, it marked the start of a spectacular ‘Spike Up’ in price in the next 6-9 months following,

Well having seen the correlation in the Open Interest and the Silver Price Spikes, I thought it would be worth charting the OI against the CSPPOI (Commercial Short Position as a Proportion of Open Interest), Again the results are startling,

I have marked with a Green Arrow on every occasion that the Open Interest breaks 140,000 to the upside, of which there are 6 preceding the present one, If you look at the adjoining Yellow CSPPOI Line you will see how the breaking of the 140,000 line co-incides with a peak in the rise of the CSPPOI!

Note how:

1. In 2005 the CSPPOI stops rising on OI breaking 140,000 and only continues rising some 2 months later when OI has fallen back below 140,000,
2. Again in 2007 the CSPPOI stops rising around the 140,000 level and only starts to rise suitably above it’s old level again when the OI drops back down below 140,000 some 4-5 months later,
3. Around July 2008 the CSPPOI stops rising in conjunction with an upwards breakout of 140,000,
4. At the end of 2009 the CSPPOI falls from a multi-month rise in direct correlation to a OI spike through the 140,000,
5. In September 2010 with the OI breaking north of 140,000, the CSPPOI starts a multi-month decline,
6. And again in Feb 2011 with the OI once more breaching 140,000 to the upside the rise in the CSPPOI peters out again,

Wow! In summary:

1. During periods of rising Open Interest, it seems the main/only effective way that the Commercials have been able to stem/cap the rise in Silver Price has been to increase their Short Side aggressively.
2. However it does truly seem that there are limits to the Commercials ability/willing to continue piling on the Shorts aggressively over and above the rise in Open Interest. Historically this has seemingly co-incided with a rise in OI above 140,000.
3. In the last week or so Open Interest for Comex Silver has risen to 140,000 which suggests strongly from an historical context that should it continue to rise, the Commercials are going to back off their aggressive shorting, which should result in an acceleration in the rise of the Silver Price thereafter.

Unless the Commercials can orchestrate a suitable downside correction from here and reduce Open Interest accordingly, then history would suggest that we may very well be on the cusp of a major move north in Hi-Ho,

This would co-incide with analysts expectations that if the $35-36 level is broken to the upside, then the move higher could get fast and furious,

It therefore looks very much to me that the Commercials are now ‘Fully In’ in this Game of Poke, If they can’t flush out other members round the table at this juncture, they will have little choice but to stand aside, The Spike Ups of 2005/2006, 2007/2008 and 2010/2011 are all testament to similar periods when the Bully’s Bluff was finally called!

All Longs must wish for a continued rise in Open Interest from here as 140,000 appears to be the Rubicon Line, If OI continues to rise, the ability/willing of the Commercials to continue fighting the upside move have historically waned dramatically,

The Thrusters are Burning,
Yours aye,
Rich (Live from 'The Bridge of the Silver Rocket Ship')